At LoanStreet’s 3rd Annual Virtual Forum, we hosted credit union and banking experts who shared insights to help us understand the future of the lending and fintech industries. With rising rates and volatility, managing balance sheets has never been more important to the health and future of credit unions. Today, we’re excited to share some key insights from those discussions.
Day 1: Rising Rates: Macro Environment Perspective – Trends, Challenges and Opportunities
Keynote 1: Curt Long, Chief Economist and Vice President of Research, NAFCU
Shifting macroeconomic trends can make it difficult to navigate volatile markets, so it’s important for credit unions to manage balance sheets, anticipate trends and address opportunities. NAFCU’s Chief Economist Curt Long shared the following points to contextualize the Forum’s discussions around how macroeconomic changes impact the market and credit unions:
- Loan growth has increased above 15% whereas share growth has decreased below 10% (and might even go negative in Q4 2022 or Q1-2 2023).
- Auto loans and home equity lines are seeing increased demand from CUs nationwide.
- NCUA’s liquidity ratio, tracking cash and short-term investments, declined rapidly in 2022, and accumulated unrealized losses on AFS investments from Q3 are projected to hit -12%.
- Auto sales are beginning to rise again with improvements in production and alleviated supply constraints, even though the auto inventory-to-sales ratio has not improved significantly and remains below 1%.
- Return on assets declined over the first half of 2022 but is consistent with pre-COVID levels.
Mr. Long presented his outlook depending on what perspective you might have and assigned some approximate probabilities to each view: 25% optimism, 60% pragmatism, and 15% pessimism. On one hand, he noted that rising Provision for Loan and Lease Loss (PLLL) expenses and rate hikes could make 2023 a tough year for credit union earnings. On the other hand, inflation may continue to decline, auto sales projections are strong and the labor market remains relatively robust despite recent tech-layoffs, so the economy could present opportunities moving forward.
Keynote 2: Rodney E. Hood, Board Member, NCUA
The Virtual Forum’s next speaker was NCUA Board Member Mr. Rodney Hood, a long-time advocate for effective regulations for credit unions, including active engagement with financial technology and working towards financial inclusion. Board Member Hood described how companies like LoanStreet are uniquely positioned to provide credit unions of all sizes the most efficient and transparent tools to help them engage in loan participations, manage their balance sheets, navigate volatility, and bolster their regulatory reporting and compliance. Among Board Member Hood’s comments:
- Although state-chartered credit unions make up just 20% of total credit unions, these smaller institutions generally have more regulatory flexibility than federally-chartered credit unions regarding loan participations, resulting in higher rates of loan participations usage.
- Mr. Hood envisions a future harmonization of the regulatory framework from the NCUA regarding participations for federally- and state-chartered CUs so that there is alignment and greater overall usage of this important tool for risk and liquidity management.
- With liquidity as one major issue forecasted in 2023 as interest rates continue to rise, Mr. Hood sees credit unions of all sizes starting to use loan participations to manage their investments, diversify their balance sheets and mitigate risk.
Board Member Hood announced that, alongside federal regulatory bodies such as the OCC and FHFA, the NCUA has also created a FinTech Office of Innovation and Access which will work with FinTech companies and help these regulatory bodies navigate changes in the lending and technology landscape. Finding synergies between these FinTech offices could lead to more financial inclusion, what Board Member Hood calls the “civil rights issue of our generation.”
Day 2: Constrained Liquidity: Loan Trading and Portfolio Management Strategies & Best Practices
Session 1 – Panelists: Eric Marcus, Managing Director of Transactions and Execution, LoanStreet; Matt Rudzinski, Director of Sales and Trading, LoanStreet
Day 2 focused on the macroeconomic impacts on liquidity, recent trends in loan trading and balance sheet strategies with loan participations. Led by Eric Marcus and Matt Rudzinski, the first session explored the biggest change in the credit union landscape: a reversal of liquidity.
- In less than six months, the ratio of buyers and sellers flipped dramatically.
- Rate volatility led to greater hesitancy on the buy side.
- One concern over the past year was the slowness with which some credit unions responded to the changing interest rate levels and volatility with respect to their lending programs.
- Credit Unions with available liquidity are able to capture some of the best purchase opportunities in years not just because of higher rates but also because of increased spreads over the risk free rate.
- In uncertain economic climates, it’s critical for credit unions to stay on top of rates so they’re not caught off-side.
- Because loan participations can be pre-priced at any time, purchases allow for CUs to be incredibly nimble when managing rate exposures versus lending programs where it can be difficult to constantly re-price rates.
- Credit unions should have board-approved policies and procedures in place to help them be more flexible when it comes to setting loan rates.
- LoanStreet’s trading desk uses a variety of inputs to price sellers’ pools at fair market rates, helping credit unions stay nimble and diversify their balance sheets – not just across asset classes, but also geography.
- LoanStreet’s participation platform allows an easy way for credit unions to explore opportunities in smaller sizes before fully committing to a third-party originator or different loan products.
Session 2 – Panelists: Ian Lampl, Co-founder & CEO, LoanStreet; Douglas Callahan, VP of Data and Analytics, LoanStreet
LoanStreet’s Ian Lampl and Douglas Callahan provided an analysis of secondary loan trading activity based upon LoanStreet’s participations data that sheds great insight into loan behavior across different asset classes and credit profiles. Their findings unveiled not only interesting trends in a rising rate environment, but also ideas on how credit unions can navigate the uncertainty.
While Ian and Doug analyzed multiple loan types – from auto, to unsecured, to mortgage, among others – below are their takeaways related to auto loans given the high interest in this asset type. Regarding auto loan prepayment rates, Ian and Doug deduced that:
- Super-prime borrowers have prepayment rates that uniformly dominate those of prime borrowers.
- As the 2-year treasury rate increases, both prime and super-prime borrowers show a decrease in their prepayment rates, following similar patterns trending downward.
- As the S&P 500 index rises and falls over time, both prime and subprime borrowers follow a similar prepayment trend that rises and falls with slopes similar to the index.
Ian and Doug looked at net charge-off and delinquency rates for consumer automobiles and deduced that:
- Both prime and super-prime borrowers had charge-off rates hovering well below 1%, with super-prime borrowers constantly having the lowest charge-off rates.
- Compared to the S&P 500 index, the graphs for prime and super-prime borrowers had charge-off rates that appeared to have no correlation to the index’s movement.
- Surprisingly, stimulus checks and changes to market rates have virtually no effect on 30+ year delinquencies for super-prime borrowers, whereas prime, near-prime and subprime are all affected.
- Compared to the S&P 500 index, the 90+ delinquency rate for super-prime, prime, and near-prime borrowers appears to increase as the index dips, and vice versa.
In volatile markets, delinquency, charge-off and prepayment rates can change rapidly and materially impact a portfolio’s returns. For credit union balance sheet managers, the most important thing is to not wait and see what happens. Instead, analyze – indeed stress – your loan performance data so you can anticipate changes to your portfolio and respond strategically and nimbly.
Interested in replays of our Virtual Forum? Visit the registration page here!